Method, software program, and system for structuring risk in a financial transaction

ABSTRACT

A computer-implemented method and system along with a processor readable medium for structuring a financial transaction. The invention includes the steps of associating, by a computer system, a first senior holder and a first subordinate holder with a first credit having a first obligation to make at least one payment, including holding in a first sub-pool a first subordinate obligation of the first obligation to pay the first subordinate holder from the first credit; associating, by the computer system, a second senior holder and a second subordinate holder with a second credit having a second obligation to make at least one payment, including holding in a second sub-pool a second subordinate obligation of the second obligation to pay the second subordinate holder from the second credit; and structuring in at least one computer memory, payments from the second subordinate holder financial instrument to perform the obligation of the first credit for the benefit of the first senior holder to the extent that the first credit enters a default state and payments due the first senior holder from all obligations in the first sub-pool to make the payments are not available.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of application Ser. No. 12/545,442filed Aug. 21, 2009 now U.S. Pat. No. 7,848,983, which is a continuationof application Ser. No. 11/876,228 filed Oct. 22, 2007, now U.S. Pat.No. 7,593,894, which is a continuation of application Ser. No.09/896,629 filed Jun. 29, 2001, now U.S. Pat. No. 7,386,502, which is acontinuation-in-part of application Ser. No. 09/724,039, filed Nov. 28,2000, now U.S. Pat. No. 7,266,524.

FIELD OF INVENTION

The present invention relates to a method, software program, and systemfor structuring risk in a financial transaction. More particularly, thepresent invention relates to a method, software program, and system forstructuring risk among different bonds.

BACKGROUND OF THE INVENTION

Collateralized Bond Obligation (“CBO”) creates strong credits (such asloans, bonds, or other obligations) by tranching a large pool ofindividual credits. The pool can be a large pool of unrated credits suchas credit card receivables or a relatively small (e.g., 20 borrowers)pool of rated and/or unrated credits in the case of a municipal StateRevolving Fund (“SRF”). The high quality of the more senior CBOtranche(s) is achieved at the expense of the quality of the more juniortranche(s). As the pools get larger, the percentage of underlyingcredits that can be expected to default decreases even though theabsolute number increases. Thus, as the pool becomes larger, the smallerthe percentage of total pool that is required to be subordinate, but themore likely it is that a subordinate tranche will in fact sustainlosses. The most subordinate tranche is viewed as similar to equity (inthe case of an SRF, it is funded with program equity) and bears a largecredit and yield penalty.

In general, because the subordinate tranche(s) bear the risk of adefault of an underlying credit and adding more credits increases thelikelihood that the subordinate tranche(s) will sustain losses (eventhough losses may decrease on a percentage basis), pools are generallyclosed unless consent is obtained from the holder(s) of the subordinatetranche(s). As a result, CBOs are generally only used in situationswhere there is a wide credit and yield spread between the quality of theunderlying credits and that of the senior tranche(s) or where there is acompelling business need for someone to hold the equity (e.g., to getthe underlying loans off the balance sheet).

SUMMARY OF THE INVENTION

The invention relates to a computer-implemented method and system alongwith a processor readable medium for structuring a financialtransaction. In a first embodiment, the method comprises associating, bya computer system, a first senior holder and a first subordinate holderwith a first credit having a first obligation to make at least onepayment, including holding in a first sub-pool a first subordinateobligation of the first obligation to pay the first subordinate holderfrom the first credit; and structuring in at least one computer memory,at least one payment from a financial instrument associated with asecond sub-pool to perform the obligation of the first credit for thebenefit of the first senior holder to the extent that the first creditenters a default state and another payment due the first senior holderfrom at least one obligation in the first sub-pool to make the otherpayment is not available.

The method advantageously comprises associating, by the computer system,a second senior holder and a second subordinate holder with a secondcredit having a second obligation to make at least one payment,including holding in a second sub-pool a second subordinate obligationof the second obligation to pay the second subordinate holder from thesecond credit. The method may also comprise increasing in the at leastone computer memory a credit rating for the first credit based on anincreased likelihood that a payment default by the first credit can befully absorbed.

Generally, the first credit is specified by a financial instrument inthe form of a bond and the first credit can be adjusted based on thestructured payment. Furthermore, the risks within the first sub-pool canbe similar to each other, with those risks different than other riskswithin the second sub-pool.

The method can further comprise issuing for the first subordinateobligation, first tranched trust bonds comprising a senior trust bondrelated to the first subordinate obligation and a junior trust bond.Preferably, a given bond of the senior and junior trust bonds includeterms that are based on terms of the first subordinate obligation, andwherein the terms further comprise an interest rate yield paid for thegiven bond that is different than an interest rate yield of the firstsubordinate obligation. If desired, the interest rate yield of the givenbond can be higher than the interest rate yield of the first subordinateobligation.

The first credit preferably has i) an underlying rating based on atranching of the tranched trust bonds and ii) a credit rating based onan increased likelihood that a payment default by the first credit canbe fully absorbed. For this embodiment, the method further comprisessecuring a given trust bond within the first tranched trust bonds firstwith a debt service reserve fund and second with a net revenue pledgefrom the payment due to the first subordinate holder. Also, the firsttranched trust bonds can be held within the first sub-pool. Accordingly,a trust payment due for a given trust bond in the sub-pool can be paidto a senior holder of a credit that is related to the given trust bondbefore being paid to another senior holder of another credit that isunrelated to the given trust bond.

Another embodiment of the invention is a computer-implemented system forstructuring a financial transaction, comprising a computer implementedassociation module configured for associating a first senior holder anda first subordinate holder with a first credit having a first obligationto make at least one payment; a computer implemented allocation moduleconfigured for allocating in a first sub-pool a first subordinateobligation of the first obligation to pay the first subordinate holderfrom the first credit; and a computer implemented credit moduleconfigured for structuring in a database module, at least one paymentfrom a financial instrument associated with a second sub-pool to performthe obligation of the first credit for the benefit of the first seniorholder to the extent that the first credit enters a default state andanother payment due the first senior holder from at least one obligationin the first sub-pool to make the other payment is not available.

In this system, the association module is advantageously configured forassociating a second senior holder and a second subordinate holder witha second credit having a second obligation to make at least one payment.Also, the system can include a further computer module configured forincreasing in at least one computer memory a credit rating for the firstcredit based on an increased likelihood that a payment default by thefirst credit can be fully absorbed. Preferably, the first credit isspecified by a financial instrument in the form of a bond, and thecredit module is further configured for adjusting the first credit basedon the structured payment.

A further embodiment of the invention relates to a computernon-transitory readable medium for structuring a financial transactioncomprising instructions than when executed by a processor causes theprocessor to perform actions. These actions include associating a firstsenior holder and a first subordinate holder with a first credit havinga first obligation to make at least one payment, including holding in afirst sub-pool a first subordinate obligation of the first obligation topay the first subordinate holder from the first credit; and crediting apayment from a second subordinate holder financial instrument to performthe obligation of the first credit for the benefit of the first seniorholder to the extent that the first credit enters a default state andanother payment due the first senior holder from an obligation in thefirst sub-pool to make the other payment is not available.

In this medium, the actions can further comprise associating a secondsenior holder and a second subordinate holder with a second credithaving a second obligation to make at least one payment, includingholding in a second sub-pool a second subordinate obligation of thesecond obligation to pay the second subordinate holder from the secondcredit.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 shows a flowchart of a method according to an embodiment of thepresent invention;

FIG. 2 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 3 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 4 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 5 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 6 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 7 shows a block diagram of a software program according to anotherembodiment of the present invention;

FIG. 8 shows a block diagram of a system according to another embodimentof the present invention;

FIG. 9 shows a block diagram of a flow of funds according to anotherembodiment of the present invention;

FIG. 10 shows a block diagram of a method according to anotherembodiment of the present invention; and

FIG. 11 shows a block diagram of a method according to anotherembodiment of the present invention.

Among those benefits and improvements that have been disclosed, otherobjects and advantages of this invention will become apparent from thefollowing description taken in conjunction with the accompanyingfigures. The figures constitute a part of this specification and includeexemplary embodiments of the present invention and illustrate variousobjects and features thereof.

DETAILED DESCRIPTION OF THE INVENTION

As required, detailed embodiments of the present invention are disclosedherein; however, it is to be understood that the disclosed embodimentsare merely exemplary of the invention that may be embodied in variousforms. The figures are not necessarily to scale, some features may beexaggerated to show details of particular components. Therefore,specific structural and functional details disclosed herein are not tobe interpreted as limiting, but merely as a basis for the claims and asa representative basis for teaching one skilled in the art to variouslyemploy the present invention.

In one embodiment a method of structuring risk in a financialtransaction is provided, including: allocating to a transaction pool afirst credit having an obligation to make specified payments and asecond credit having an obligation to make specified payments, each ofthe first credit and second credit being in a non-default state when arespective obligation is met and being in a default state when arespective obligation is not met; associating a first senior holder anda first subordinate holder with the first credit using a) a respectivefirst senior holder financial instrument through which payments from thefirst credit flow to the first senior holder and b) a respective firstsubordinate holder financial instrument through which payments from thefirst credit flow to the first subordinate holder; associating a secondsenior holder and a second subordinate holder with the second creditusing a) a respective second senior holder financial instrument throughwhich payments from the second credit flow to the second senior holderand b) a respective second subordinate holder financial instrumentthrough which payments from the second credit flow to the secondsubordinate holder; structuring the first senior holder financialinstrument and the first subordinate holder financial instrument to givepriority to payments due the first senior holder prior to payments duethe first subordinate holder in the event the first credit enters thedefault state; using payments from the second subordinate holderfinancial instrument to perform the obligation of the first credit forthe benefit of the first senior holder to the extent that the firstcredit enters the default state and payments due the first senior holderare not available; and providing the second subordinate holder thebenefit of the obligation of the first credit to the extent thatpayments due the second subordinate holder were used to perform theobligation of the first credit.

In another embodiment the method may further include: structuring thesecond senior holder financial instrument and the second subordinateholder financial instrument to give priority to payments due the secondsenior holder prior to payments due the second subordinate holder in theevent the second credit enters the default state; using payments fromthe first subordinate holder financial instrument to perform theobligation of the second credit for the benefit of the second seniorholder to the extent that the second credit enters the default state andpayments due the second senior holder are not available; and providingthe first subordinate holder the benefit of the obligation of the secondcredit to the extent that payments due the first subordinate holder wereused to perform the obligation of the second credit.

In another embodiment at least one of the first senior holder financialinstrument, the second senior holder financial instrument, the firstsubordinate holder financial instrument, the second subordinate holderfinancial instrument, the first credit, and the second credit mayinclude a bond.

In another embodiment at least one of the first credit and second creditmay include a credit of the type selected from a municipal credit, atax-exempt hospital credit, an industrial credit, and a high-yieldcredit.

In another embodiment at least one of a) the step of providing thesecond subordinate holder the benefit of the obligation of the firstcredit to the extent that payments due the second subordinate holderwere used to perform the obligation of the first credit may be carriedout through an assignment and b) the step of providing the firstsubordinate holder the benefit of the obligation of the second credit tothe extent that payments due the first subordinate holder were used toperform the obligation of the second credit may be carried out throughan assignment.

In another embodiment at least one of a) the step of providing thesecond subordinate holder the benefit of the obligation of the firstcredit to the extent that payments due the second subordinate holderwere used to perform the obligation of the first credit may be carriedout through a subrogation and b) the step of providing the firstsubordinate holder the benefit of the obligation of the second credit tothe extent that payments due the first subordinate holder were used toperform the obligation of the second credit may be carried out through asubrogation.

In another embodiment at least one of a) the step of providing thesecond subordinate holder the benefit of the obligation of the firstcredit to the extent that payments due the second subordinate holderwere used to perform the obligation of the first credit may be carriedby providing a recovery value associated with first credit and b) thestep of providing the first subordinate holder the benefit of theobligation of the second credit to the extent that payments due thefirst subordinate holder were used to perform the obligation of thesecond credit may be carried out by providing a recovery valueassociated with second credit.

In another embodiment at least one of a) the step of providing thesecond subordinate holder the benefit of the obligation of the firstcredit to the extent that payments due the second subordinate holderwere used to perform the obligation of the first credit may be carriedby providing a liquidation value associated with first credit and b) thestep of providing the first subordinate holder the benefit of theobligation of the second credit to the extent that payments due thefirst subordinate holder were used to perform the obligation of thesecond credit may be carried out by providing a liquidation valueassociated with second credit.

In another embodiment at least one of a) the first senior financialinstrument and the first subordinate financial instrument may beincluded in a first master financial instrument and b) the second seniorfinancial instrument and the second subordinate financial instrument maybe included in a second master financial instrument.

In another embodiment at least one of the first master financialinstrument and the second master financial instrument may form a seriesof bonds having a senior/subordinate structure.

In another embodiment the transaction pool may comprise a trust.

In another embodiment a method of structuring risk in a financialtransaction is provided, including: allocating to a transaction pool ncredits, each of the credits having an obligation to make specifiedpayments and each of the credits being in a non-default state when arespective obligation is met and being in a default state when arespective obligation is not met; associating a senior holder and asubordinate holder with each of the credits using a) a respective seniorholder financial instrument through which payments from a respectivecredit flow to the senior holder and b) a respective subordinate holderfinancial instrument through which payments from a respective creditflow to the subordinate holder; structuring each senior holder financialinstrument and each subordinate holder financial instrument to givepriority to payments due each respective senior holder prior to paymentsdue each respective subordinate holder in the event a respective creditenters the default state; using payments from at least one subordinateholder financial instrument associated with a credit in the non-defaultstate to perform the obligation of a credit in the default state to theextent that payments due the senior holder associated with the credit inthe default state are not available; and providing each subordinateholder at least a portion of the benefit of the obligation of the creditin the default state to the extent that payments due each subordinateholder were used to perform the obligation of the credit in the defaultstate; wherein n is an integer in the range of 1 to 1000.

In another embodiment the transaction pool may comprise a trust.

In another embodiment a method of structuring risk in a financialtransaction is provided, including: allocating to a transaction pool afirst sub-pool containing a first credit having an obligation to makespecified payments and a second credit having an obligation to makespecified payments, each of the first credit and second credit being ina non-default state when a respective obligation is met and being in adefault state when a respective obligation is not met; allocating to thetransaction pool a second sub-pool containing a third credit having anobligation to make specified payments and a fourth credit having anobligation to make specified payments, each of the third credit andfourth credit being in a non-default state when a respective obligationis met and being in a default state when a respective obligation is notmet; associating a first senior holder and a first subordinate holderwith the first credit using a) a respective first senior holderfinancial instrument through which payments from the first credit flowto the first senior holder and b) a respective first subordinate holderfinancial instrument through which payments from the first credit flowto the first subordinate holder; associating a second senior holder anda second subordinate holder with the second credit using a) a respectivesecond senior holder financial instrument through which payments fromthe second credit flow to the first senior holder and b) a respectivesecond subordinate holder financial instrument through which paymentsfrom the second credit flow to the second subordinate holder;associating a third senior holder and a third subordinate holder withthe third credit using a) a respective third senior holder financialinstrument through which payments from the third credit flow to thethird senior holder and b) a respective third subordinate holderfinancial instrument through which payments from the third credit flowto the third subordinate holder; associating a fourth senior holder anda fourth subordinate holder with the fourth credit using a) a respectivefourth senior holder financial instrument through which payments fromthe fourth credit flow to the fourth senior holder and b) a respectivefourth subordinate holder financial instrument through which paymentsfrom the fourth credit flow to the fourth subordinate holder;structuring the first senior holder financial instrument and the firstsubordinate holder financial instrument to give priority to payments duethe first senior holder prior to payments due the first subordinateholder in the event the first credit enters the default state;structuring the second senior holder financial instrument and the secondsubordinate holder financial instrument to give priority to payments duethe second senior holder prior to payments due the second subordinateholder in the event the second credit enters the default state;structuring the third senior holder financial instrument and the thirdsubordinate holder financial instrument to give priority to payments duethe third senior holder prior to payments due the third subordinateholder in the event the third credit enters the default state;structuring the fourth senior holder financial instrument and the fourthsubordinate holder financial instrument to give priority to payments duethe fourth senior holder prior to payments due the fourth subordinateholder in the event the fourth credit enters the default state; usingpayments from the second subordinate holder financial instrument toperform the obligation of the first credit for the benefit of the firstsenior holder to the extent that the first credit enters the defaultstate and payments due the first senior holder are not available; usingpayments from at least one of the third subordinate holder financialinstrument and the fourth subordinate holder financial instrument toperform the obligation of the first credit for the benefit of the firstsenior holder to the extent that the payments of the second subordinateholder financial instrument used for the benefit of the first seniorholder do not cover the obligation of the first credit; providing eachof the third subordinate holder and the fourth subordinate holder thebenefit of the obligation of the first credit to the first senior holderto the extent that the payments of the third subordinate holderfinancial instrument and the fourth subordinate holder financialinstrument are used for the benefit of the first senior holder; andproviding the second subordinate holder the benefit of the obligation ofthe first credit to the first senior holder to the extent that paymentsof the second subordinate holder financial instrument were used toperform the obligation of the first credit and to the extent that abenefit exists after any benefit is provided the third subordinateholder and the fourth subordinate holder.

In another embodiment all credits allocated to a particular sub-pool mayhave a substantially similar risk of entering the default state.

In another embodiment all credits allocated to a particular sub-pool maybe selected from one of a traditional municipal credit, a tax-exempthospital credit, an industrial corporate credit, and a high-yieldcredit.

In another embodiment the transaction pool may comprise a trust.

In another embodiment a method of structuring risk in a financialtransaction is provided, including: structuring a transaction pool withn sub-pools; allocating to each of the sub-pools between j and kcredits, each credit having an obligation to make specified payments andeach credit being in a non-default state when a respective obligation ismet and being in a default state when a respective obligation is notmet; associating a senior holder and a subordinate holder with each ofthe credits using a) a respective senior holder financial instrumentthrough which payments from the credit flow to the senior holder and b)a respective subordinate holder financial instrument through whichpayments from the credit flow to the subordinate holder; structuringeach senior holder financial instrument and each subordinate holderfinancial instrument to give priority to payments due the respectivesenior holder prior to payments due the respective subordinate holder inthe event the associated credit enters the default state; using paymentsfrom each subordinate holder financial instrument associated withcredits within the same sub-pool as a defaulting credit to perform theobligation of the defaulting credit for the benefit of the associatedsenior holder to the extent that payments due the senior holderassociated with the defaulting credit are not available; using paymentsfrom each subordinate holder financial instrument associated withcredits outside the sub-pool containing the defaulting credit to performthe obligation of the defaulting credit for the benefit of theassociated senior holder to the extent that the payments of eachsubordinate holder financial instrument associated with credits withinthe same the sub-pool as the defaulting credit which were used for thebenefit of the senior holder do not cover the obligation of the firstcredit; providing each subordinate holder associated with creditsoutside the sub-pool containing the defaulting credit the benefit of theobligation of the defaulting credit to the associated senior holder tothe extent that the payments due each subordinate holder associated withcredits outside the sub-pool containing the defaulting credit were usedto perform the obligation of the defaulting credit; and providing eachsubordinate holder associated with credits within the same sub-pool asthe defaulting credit the benefit of the obligation of the defaultingcredit to the associated senior holder to the extent that payments dueeach subordinate holder associated with credits within the same sub-poolas the defaulting credit were used to perform the obligation of thedefaulting credit and to the extent that a benefit exists after anybenefit is provided each subordinate holder associated with creditsoutside the sub-pool containing the defaulting credit; wherein n, j, andk are integers in the range of 1 to 1000.

In another embodiment the transaction pool may comprise a trust.

In another embodiment a method of structuring risk in a financialtransaction is provided, including: structuring a transaction pool withn sub-pools, each of the sub-pools containing between j and kmini-pools; allocating to each of the mini-pools between j and k creditsand allocating to each of the sub-pools between j and k credits, eachcredit having an obligation to make specified payments and each creditbeing in a non-default state when a respective obligation is met andbeing in a default state when a respective obligation is not met;associating a senior holder and a subordinate holder with each creditusing a respective senior holder financial instrument through whichpayments from the credit flow to the senior holder and a respectivesubordinate holder financial instrument through which payments from thecredit flow to the subordinate holder; structuring each senior holderfinancial instrument and each subordinate holder financial instrument togive priority to payments due the respective senior holder prior topayments due the respective subordinate holder in the event theassociated credit enters the default state; using payments from eachsubordinate holder financial instrument associated with credits withinthe same mini-pool as the defaulting credit to perform the obligation ofthe senior holder financial instrument associated with the defaultingcredit for the benefit of the senior holder to the extent that paymentsdue the senior holder associated with the defaulting credit are notavailable; using payments from each subordinate holder financialinstrument associated with credits outside the mini-pool with thedefaulting credit but within the same sub-pool as the defaulting creditto perform the obligation of the senior holder financial instrumentassociated with the defaulting credit for the benefit of the seniorholder to the extent that the payments of each subordinate holderfinancial instrument associated with credits within the same mini-poolas the defaulting credit which were used for the benefit of the seniorholder do not cover the obligation of the defaulting credit; usingpayments from each subordinate holder financial instrument associatedwith credits outside the sub-pool containing the defaulting credit toperform the obligation of the senior holder financial instrumentassociated with the defaulting credit for the benefit of the seniorholder to the extent that the payments of each subordinate holderfinancial instrument associated with credits within the same sub-pool asthe defaulting credit which were used for the benefit of the seniorholder do not cover the obligation of the defaulting credit; providingeach subordinate holder associated with credits outside the sub-poolcontaining the defaulting credit the benefit of the obligation of thedefaulting credit to the associated senior holder to the extent that thepayments due each subordinate holder associated with credits outside thesub-pool containing the defaulting credit were used to perform theobligation of the defaulting credit; providing each subordinate holderassociated with credits within the same sub-pool as the defaultingcredit the benefit of the obligation of the defaulting credit to theassociated senior holder to the extent that payments due eachsubordinate holder associated with credits within the same sub-pool asthe defaulting credit were used to perform the obligation of thedefaulting credit and to the extent that a benefit exists after anybenefit is provided each subordinate holder associated with creditsoutside the sub-pool containing the defaulting credit; and providingeach subordinate holder associated with credits within the samemini-pool as the defaulting credit the benefit of the obligation of thedefaulting credit to the associated senior holder to the extent thatpayments due each subordinate holder associated with credits within thesame mini-pool as the defaulting credit were used to perform theobligation of the defaulting credit and to the extent that a benefitexists after a) any benefit is provided each subordinate holderassociated with credits outside the sub-pool containing the defaultingcredit and b) after any benefit is provided each subordinate holderassociated with credits outside the mini-pool containing the defaultingcredit and within the sub-pool containing the defaulting credit; whereinn, j, and k are integers in the range of 1 to 1000.

In another embodiment all credits allocated to a particular sub-pool mayhave a substantially similar risk of entering the default state.

In another embodiment all credits allocated to a particular sub-pool maybe selected from one of a traditional municipal credit, a tax-exempthospital credit, an industrial corporate credit, and a high-yieldcredit.

In another embodiment all credits allocated to a particular mini-poolwithin a particular sub-pool may be selected from a sub-categoryassociated with the credits allocated to the particular sub-pool.

In another embodiment the transaction pool may comprise a trust.

In another embodiment a method of structuring risk in a financialtransaction is provided, comprising: allocating to a trust a firstissuer credit having an obligation to make specified payments and asecond issuer credit having an obligation to make specified payments,each of the first issuer credit and second issuer credit being in anon-default state when a respective obligation is met and being in adefault state when a respective obligation is not met; associating afirst senior holder and a first subordinate holder with the first issuercredit using a) a respective first senior holder trust instrumentthrough which payments from the first issuer credit flow to the firstsenior holder and b) a respective first subordinate holder trustinstrument through which payments from the first issuer credit flow tothe first subordinate holder; associating a second senior holder and asecond subordinate holder with the second issuer credit using a) arespective second senior holder trust instrument through which paymentsfrom the second issuer credit flow to the second senior holder and b) arespective second subordinate holder trust instrument through whichpayments from the second issuer credit flow to the second subordinateholder; structuring the first senior holder trust instrument and thefirst subordinate holder trust instrument to give priority to paymentsdue the first senior holder prior to payments due the first subordinateholder in the event the first issuer credit enters the default state;using payments from the second subordinate holder trust instrument toperform the obligation of the first issuer credit for the benefit of thefirst senior holder to the extent that the first issuer credit entersthe default state and payments due the first senior holder are notavailable; and providing the second subordinate holder the benefit ofthe obligation of the first issuer credit to the extent that paymentsdue the second subordinate holder were used to perform the obligation ofthe first issuer credit.

In another embodiment at least one of the first senior holder trustinstrument, the first subordinate holder trust instrument, the secondsenior holder trust instrument, and the second subordinate holder trustinstrument may be a bond issued by the trust.

In another embodiment a method of structuring risk in a financialtransaction is provided, comprising: allocating to a trust an issuercredit having an obligation to make specified payments, wherein theissuer credit is in a non-default state when the obligation is met andis in a default state when the obligation is not met; associating asenior holder and a subordinate holder with the issuer credit using a) asenior holder trust instrument through which payments from the issuercredit flow to the senior holder and b) a subordinate holder trustinstrument through which payments from the issuer credit flow to thesubordinate holder; and structuring the senior holder trust instrumentand the subordinate holder trust instrument to give priority to paymentsdue the senior holder prior to payments due the subordinate holder inthe event the issuer credit enters the default state.

In another embodiment at least one of the senior holder trust instrumentand the subordinate holder trust instrument may be a bond issued by thetrust.

In summary, one embodiment of the present invention provides for whatwill hereinafter be referred to as the Tranche Subordinated Bondapproach (or “TSB” approach), wherein each senior and subordinate holderis primarily exposed to a particular identified (“related”) credit andonly secondarily exposed to the impact of a default of any other(“unrelated”) credit. This is achieved by tranching each individualcredit as well as the pool of credits. In other words, each senior TSBholder is primarily exposed to (and perhaps even owns an interest in) aparticular credit. The senior TSB holder cannot be affected by anyunderlying default except a default on its related credit and only ifthe amount of the default exceeds the amount of the subordinate TSBsrelated to the same underlying credit. It is believed that this shouldalso have the benefit of avoiding concentration and capacity problemsfor holders of senior TSBs, analogous to bond insurance for which holdercapacity is based on the underlying credit. If a default exceeds theamount of the related subordinate TSBs (i.e., the subordinate TSBs thatare primarily exposed to the same underlying credit), then amountspayable to the holders of unrelated subordinate TSBs would be applied tomake the holders of the related senior TSBs whole and the unrelatedsubordinate TSB holders would become owners of or become subrogated tothe claim of the related senior TSB holders.

If the amount of the senior TSBs is less than the expected recoveryvalue in the event of a default of the underlying credit, then theunrelated subordinate TSB holders would be exposed to a temporarynon-payment (“timing risk”) but not to a permanent non-payment(“ultimate payment risk”) in the event of a default on the underlyingcredit since unrelated subordinate holders would be reimbursed fromrecovery value when it is realized. Another characteristic of the TSBapproach is that the amount of senior TSBs created may be limited toincrease the likelihood that a payment default could be fully absorbedby the holders of the related subordinate TSB holders. Consequently,there may be an intermediate tranche which is in effect a pass-throughof the underlying credit with neither the benefit nor burden of thetranching of the pool. In one example the intermediate tranche wouldhave the identical credit characteristics of the related underlyingcredit, with the possible exception that all of the recovery value ofthe loan may be devoted first to amounts due to the related senior TSBs(including such amounts to which unrelated subordinate TSBs have becomesubrogated).

Thus, when a new credit is added to the pool or the amount of anexisting credit is increased, the risk to the unrelated subordinated TSBholders can be minimized, first, because the first loss is borne byholders of the related subordinate TSBs and, second, because the risk tothe unrelated subordinate TSB holders is essentially timing risk ratherthan ultimate payment risk. Credits could be added to the pool either atthe behest of an issuer or by a holder of an underlying credit. Thisapproach could be targeted toward credits that in fact are directly heldin the public debt markets such as investment grade rated credits orhigh-yield credits that are directly held by institutional buyers. Bothultimate payment risk and timing risk to unrelated subordinate TSBholders could effectively be eliminated through the use of sub-poolsand/or mini-pools as described below.

To further reduce the risk to holders of unrelated subordinate TSBs, itmay be desirable to create sub-pools within the larger pool where thenature of the risk to subordinate TSB holders within the sub-pool issimilar. For example, traditional municipal credits, tax-exempt hospitalcredits, industrial corporate credits, and high-yield credits (includingmunicipal) might be separated. Also, credits of a particular ratingcategory might be separated from credits of a different rating category.It is believed that the senior TSBs within the sub-pool should be ableto independently achieve high-grade ratings. However, to maximize thecredit benefit to all senior TSBs, all senior TSBs could ultimately besecured by all subordinate TSBs. To still insulate subordinate TSBholders from risk associated with a different sub-pool, it may be arequirement that, in order to combine sub-pools, the senior TSBs withineach sub-pool must meet a specified rating standard (e.g., triple-A)without the benefit of any cross-subsidization from any other sub-pool.Hence, no subordinate TSB from a different pool would be affected unlessa credit that is triple-A on its own (the senior TSBs within the othersub-pool) would default without the benefit of the cross-subsidization.This reduces the risk to each subordinate TSB holder from credits thatare qualitatively different, while maintaining the benefit to the seniorTSBs of having the largest and most diverse possible pool of subordinateTSBs securing the senior TSBs.

From a credit and disclosure perspective, it is believed that animportant factor to a senior TSB holder are the quality of theunderlying credit (which the TSB holder is explicitly choosing) and thequality of the credit enhancement provided by the entire pool. Given thediversity of the pool, it is believed that it would be unnecessary toprovide disclosure on any particular credit. In any case, it is likelythat all of the underlying credits would be registered or otherwise havepublicly available disclosure that could be incorporated by reference.The ability to identify each underlying credit and incorporateddisclosure by reference could be important to providing adequatedisclosure to subordinated TSB holders who are on a secondary ortertiary basis exposed to credits across the pool. It is believed,however, that the relevant disclosure on an unrelated sub-pool should beno more than would be required for the senior tranche of a stand alonepool (since no subordinate TSB holder would be affected by a default ona credit within an unrelated pool unless the senior tranche wouldotherwise default), which for a large and diverse pool would be astandard disclosure only.

In another embodiment, if, for a particular type of credit, there aresub-pools representing different rating categories, the integrity of thesub-pools could be maximized in the event of a downgrade of the ratingof an underlying credit by transferring the credit from the higher ratedsub-pool to the lower rated sub-pool. This should not materially affectthe holders of the related senior TSBs since they are secured by thewhole pool. It is believed that this may slightly disadvantage theholders of the related subordinate TSBs in that they would be exposed tosecondary risk related to an underlying default in the lower ratedsub-pool. However, it would impose on the subordinate TSB holder whochose the credit the full burden of the credit deterioration rather thansharing it with the holders of unrelated subordinate TSBs within thehigher rated sub-pool. The holders in the sub-pool to which the creditis transferred would not be hurt since their exposure would be nodifferent than that related to adding any other qualifying credit to thesub-pool. Similarly, if an underlying credit has its rating increased,that credit could be transferred to the higher rated sub-pool for thatcredit type. For the same reasons as just stated, there would be nodetriment to the holders in the sub-pool to which the credit istransferred and the transfer would give the holder of the transferredsubordinate TSB the full benefit of the appreciation of the credit.

Any actual default would be primarily the responsibility of thesubordinate TSB holders in the related sub-pool (and their transferees)at the time of the default and secondarily the responsibility of theunrelated subordinate TSB holders within the pool. Alternatively, theprogram manager could at some earlier point identify a troubled creditas the responsibility of the subordinate TSB holders as of that date(and their transferees). Thus, a problem with a particular credit can beisolated so as not to affect the ability to add other credits to thepool. Otherwise, a troubled credit could disincentivize potentialsubordinated TSB holders from participating in the related pool since aloss on that credit would be shared by the new subordinated TSB holder.

In a further embodiment, for credits without significant recoveryvalues, such as credits in bankruptcy which may or may not haveliquidation values (for which it is impossible to eliminate ultimatepayment risk by tranching an individual credit), or simply to eliminatetiming risk to unrelated TSBs, or to increase the proportion of thesecurities that can be converted into senior TSBs, it may be necessaryor desirable for the subordinate TSB structure to be based on groups ofunderlying credits (a “mini-pool”) rather than a single underlyingcredit. The structure of a mini-pool would be similar to that of asub-pool in that any default within the pool would first be borne by theholders of the subordinate TSBs within the mini-pool before the holdersof any unrelated subordinate TSBs would be affected. Each mini-poolmight contain credits of a particular sub-category of the type ofcredits in the corresponding sub-pool (e.g., credits related to aparticular industry, such as telecommunications). The senior TSBsrelated to a mini-pool could still be based on individual credits ratherthan on the mini-pool of credits. The test for addition of a mini-poolto a sub-pool could be significantly less rigorous than the test foraddition of a sub-pool to the pool. It may only be necessary that theultimate payment risk and/or timing risk to holders of unrelatedsubordinate TSBs be made comparable to the risk posed by each otherunderlying credit or pool of mini-credits within the sub-pool.

Using the TSB approach, an institutional holder (e.g., a pension fund)could create high-grade, credit enhanced, more liquid senior TSBsrelated to either individual securities or a mini-pool of securitiesthat it holds. As the pool gets larger, the credit quality of the seniorTSBs would increase (or at least the probability of any non-paymentwould get less and less). It is further believed that the result for thesenior TSBs would be similar to adding bond insurance to municipalbonds: a) an increase in price or b) a decrease in market yield.Alternatively, rather than being reflected in the price of the seniorTSBs, the economic benefit of the TSB structure could be reflected in ahigher retained yield on the subordinate TSBs.

Referring now to FIG. 1, a flowchart showing a method according to anembodiment of the invention is shown. As seen in this FIG. 1, Pool 101contains First Credit 103. First Credit 103, which includes anobligation to make specified payments, can be in a non-default state ifthe obligation is met or a default state if the obligation is not met.First Senior Holder 105 is associated with First Credit 103 using FirstSenior Holder Financial Instrument 107, through which payments flow fromFirst Credit 103 to First Senior Holder 105. First Subordinate Holder109 is associated with First Credit 103 using First Subordinate HolderFinancial Instrument 111, through which payments flow from First Credit103 to First Subordinate Holder 109. First Senior Holder FinancialInstrument 107 and First Subordinate Holder Financial Instrument 111 maybe structured to provide for the priority of payments from First Credit103 to First Senior Holder 105 prior to payments from First Credit 103to First Subordinate Holder 109.

Pool 101 also contains Second Credit 113. Second Credit 113, whichincludes an obligation to make specified payments, can be in anon-default state if the obligation is met or a default state if theobligation is not met. Second Senior Holder 115 is associated withSecond Credit 113 using Second Senior Holder Financial Instrument 117,through which payments flow from Second Credit 113 to Second SeniorHolder 115. Second Subordinate Holder 119 is associated with SecondCredit 113 using Second Subordinate Holder Financial Instrument 121,through which payments flow from Second Credit 113 to Second SubordinateHolder 119. Second Senior Holder Financial Instrument 117 and SecondSubordinate Holder Financial Instrument 121 may be structured to providefor the priority of payments from Second Credit 113 to Second SeniorHolder 115 prior to payments from Second Credit 113 to SecondSubordinate Holder 119.

In the event that First Credit 103 enters the default state any paymentsavailable from First Credit 103 are first applied to First Senior Holder105 (at the expense of First Subordinate Holder 109). To the extent thatthe payments to First Senior Holder 105 are still not sufficient tocover the obligation of First Credit 103 then payments due SecondSubordinate Holder 119 are used to cover the obligation to First SeniorHolder 105 (this is shown by the dashed line marked A in FIG. 2).Further, to the extent that any benefit remains in the obligation ofFirst Credit 103 to First Senior Holder 105 then Second SubordinateHolder 119 is provided such remaining benefit (this is shown by thedashed line marked B in FIG. 2).

Of course, if Second Credit 113 enters the default state rather thanFirst Credit 103 an analogous operation is carried out with regard toFirst Subordinate Holder 109, Second Senior Holder 115, and SecondCredit 113.

Referring now to FIG. 2, a flowchart showing a method according toanother embodiment of the present invention is shown. This embodiment issimilar to the embodiment of FIG. 1 and elements of FIG. 1 correspondingto elements of FIG. 2 will not be described again in detail. Theprinciple difference between the embodiments of FIGS. 1 and 2 is that inthe embodiment of FIG. 2 the First Senior Holder Financial Instrument207 and the First Subordinate Holder Financial Instrument 211 areincluded within a First Master Financial Instrument 223 and the SecondSenior Holder Financial Instrument 217 and the Second Subordinate HolderFinancial Instrument 221 are included within a Second Master FinancialInstrument 225 The two embodiments otherwise operate in a similarmanner.

Referring now to FIG. 3, a flowchart showing a method according toanother embodiment of the invention is shown. As seen in this Fig., Pool301 contains First Credit 303, Second Credit 305, Third Credit 307, andFourth Credit 309. First Credit 303 and Second Credit 305 are includedwithin First Sub-Pool 311 and Third Credit 307 and Fourth Credit 309 areincluded within Second Sub-Pool 313. Each of First Credit 303, SecondCredit 305, Third Credit 307, and Fourth Credit 309 includes anobligation to make specified payments and each of First Credit 303,Second Credit 305, Third Credit 307, and Fourth Credit 309 can be in anon-default state if a respective obligation is met or a default stateif the obligation is not met.

First Senior Holder 315 is associated with First Credit 303 using FirstSenior Holder Financial Instrument 317, through which payments flow fromFirst Credit 303 to First Senior Holder 315. First Subordinate Holder319 is associated with First Credit 303 using First Subordinate HolderFinancial Instrument 321, through which payments flow from First Credit303 to First Subordinate Holder 319. First Senior Holder FinancialInstrument 317 and Second Senior Holder Financial Instrument 321 may bestructured to provide for the priority of payments from First Credit 303to First Senior Holder 315 prior to payments from First Credit 303 toFirst Subordinate Holder 319.

Further, as shown in FIG. 3, each of second through fourth SeniorHolders and Subordinate Holders are associated with respective Creditsthrough respective Financial Instruments. The various FinancialInstruments may be structured as described above with reference to thepriority of payments between corresponding Senior Holders andSubordinate Holders.

In the event that First Credit 303 enters the default state any paymentsavailable from First Credit 303 are first applied to First Senior Holder315 (at the expense of First Subordinate Holder 319). To the extent thatthe payments to First Senior Holder 315 are still not sufficient tocover the obligation of First Credit 303 then payments due SecondSubordinate Holder 327 are used to cover the obligation to First SeniorHolder 315 (this is shown by the dashed line marked A in FIG. 3).

Further, to the extent that the payments to First Senior Holder 315which had been due Second Subordinate Holder 327 are insufficient tofulfill the obligation of First Credit 303 the payments due ThirdSubordinate Holder 335 and Fourth Subordinate Holder 343 may be used(shown by the dashed lines marked C and D in FIG. 3). Thereafter, to theextent that any benefit remains in the obligation of First Credit 303 toFirst Senior Holder 315, and to the extent that payments due ThirdSubordinate Holder 335 and Fourth Subordinate Holder 343 had beendirected to First Senior Holder 315, Third Subordinate Holder 335 andFourth Subordinate Holder 343 are provided such remaining benefit (thisis shown by the dashed lines marked E and F in FIG. 3). Finally, to theextent that any benefit remains in the obligation of First Credit 303 toFirst Senior Holder 315 after Third Subordinate Holder 335 and FourthSubordinate Holder 343 have been made whole, Second Subordinate Holder327 is provided such remaining benefit (this is shown by the dashed linemarked B in FIG. 3).

Of note is the fact that the operation of Sub-Pool 311 is similar to theoperation of Pool 101 of FIG. 1. Also of note is the fact that anyremaining benefit may not be applied to Second Subordinate Holder 327(associated with a Credit in the same Sub-Pool as the defaulting Credit)until Third Subordinate Holder 335 and Fourth Subordinate Holder 343(associated with a Credit in a different Sub-Pool than the defaultingCredit) have been made whole. In another example, if a Credit other thanFirst Credit 303 enters the default state then an analogous operation iscarried out with regard to each Subordinate Holder, each Senior Holder,and each Credit.

Referring now to FIG. 4, a flowchart showing a method according toanother embodiment of the present invention is shown. This embodiment issimilar to the embodiment of FIG. 3 and elements of FIG. 3 correspondingto elements of FIG. 4 will not be described again in detail. Theprinciple difference between the embodiments of FIGS. 3 and 4 is that inthe embodiment of FIG. 4 each associated Senior Holder FinancialInstrument and Subordinate Holder Financial Instrument is includedwithin a Master Financial Instrument. The two embodiments otherwiseoperate in a similar manner.

Referring now to FIG. 5, a flowchart showing a method according toanother embodiment of the invention is shown. As seen in this Fig., Pool501 contains First Credit 503, Second Credit 505, Third Credit 507,Fourth Credit 509 and Fifth Credit 511. Second Credit 505 and ThirdCredit 507 are included within Mini-Pool 512 which in turn is includedwithin First Sub-Pool 513. First Credit 503 is also included withinFirst Sub-Pool 513. Further, Fourth Credit 509 and Fifth Credit 511 areincluded within Second Sub-Pool 515. Each of First Credit 503, SecondCredit 505, Third Credit 507, Fourth Credit 509 and Fifth Credit 511includes an obligation to make specified payments and each of FirstCredit 503, Second Credit 505, Third Credit 507, Fourth Credit 509 andFifth Credit 511 can be in a non-default state if a respectiveobligation is met or a default state if the obligation is not met.

First Senior Holder 517 is associated with First Credit 503 using FirstSenior Holder Financial Instrument 519, through which payments flow fromFirst Credit 503 to First Senior Holder 517. First Subordinate Holder521 is associated with First Credit 503 using First Subordinate HolderFinancial Instrument 523, through which payments flow from First Credit503 to First Subordinate Holder 521. First Senior Holder FinancialInstrument 519 and First Subordinate Holder Financial Instrument 523 maybe structured to provide for the priority of payments from First Credit503 to First Senior Holder 517 prior to payments from First Credit 503to First Subordinate Holder 521.

Further, as shown in FIG. 5, each of second through fifth Senior Holdersand Subordinate Holders are associated with respective Credits throughrespective Financial Instruments. The various Financial Instruments maybe structured as described above with reference to the priority ofpayments between corresponding Senior Holders and Subordinate Holders.

In the event that Second Credit 505 enters the default state anypayments available from Second Credit 505 are first applied to SecondSenior Holder 525 (at the expense of Second Subordinate Holder 529). Tothe extent that the payments to Second Senior Holder 525 are still notsufficient to cover the obligation of Second Credit 505, payments dueThird Subordinate Holder 537 are used to cover the obligation to SecondSenior Holder 525 (this is shown by the dashed line marked A in FIG. 5).Further, to the extent that the payments to Second Senior Holder 525which had been due Third Subordinate Holder 537 are insufficient tofulfill the obligation of Second Credit 505, payments due FirstSubordinate Holder 521 may be used (shown by the dashed line marked C inFIG. 5).

Further still, to the extent that the payments to Second Senior Holder525 which had been due First Subordinate Holder 521 are insufficient tofulfill the obligation of Second Credit 505, payments due FourthSubordinate Holder 545 and Fifth Subordinate Holder 553 may be used(shown by the dashed lines marked E and F in FIG. 5).

Thereafter, to the extent that any benefit remains in the obligation ofSecond Credit 505 to Second Senior Holder 525, and to the extent thatpayments due Fourth Subordinate Holder 545 and Fifth Subordinate Holder553 had been directed to Second Senior Holder 525, Fourth SubordinateHolder 545 and Fifth Subordinate Holder 553 are provided such remainingbenefit (this is shown by the dashed lines marked G and H in FIG. 5).Next, to the extent that any benefit remains in the obligation of SecondCredit 505 to Second Senior Holder 525 after Fourth Subordinate Holder545 and Fifth Subordinate Holder 553 have been made whole, and to theextent that payments due First Subordinate Holder 521 had been directedto Second Senior Holder 525, First Subordinate Holder 521 is providedsuch remaining benefit (this is shown by the dashed line marked D inFIG. 5).

Finally, to the extent that any benefit remains in the obligation ofSecond Credit 505 to Second Senior Holder 525 after First SubordinateHolder 521, Fourth Subordinate Holder 545 and Fifth Subordinate Holder553 have been made whole, Third Subordinate Holder 537 is provided suchremaining benefit (this is shown by the dashed line marked B in FIG. 5).

Of note is the fact that the operation of Mini-Pool 512 is similar tothe operation of both Sub-Pool 311 of FIG. 3 and Pool 101 of FIG. 1.Also of note is the fact that: a) any remaining benefit may not beapplied to Third Subordinate Holder 537 (which is associated with aCredit in the same Mini-Pool as the defaulting Credit) until FirstSubordinate Holder 521 (which is associated with a Credit outside theMini-Pool with the defaulting Credit) has been made whole; and b) anyremaining benefit may not be applied to First Subordinate Holder 521(which is associated with a Credit in the same Sub-Pool as thedefaulting Credit) until Fourth Subordinate Holder 545 and FifthSubordinate Holder 553 (which are associated with Credits outside theSub-Pool with the defaulting Credit) have been made whole.

Of course, if a Credit other than Second Credit 505 enters the defaultstate then an analogous operation is carried out with regard to eachSubordinate Holder, each Senior Holder, and each Credit.

Referring now to FIG. 6, a flowchart showing a method according toanother embodiment of the present invention is shown. This embodiment issimilar to the embodiment of FIG. 5 and elements of FIG. 5 correspondingto elements of FIG. 6 will not be described again in detail. Theprinciple difference between the embodiments of FIGS. 5 and 6 is that inthe embodiment of FIG. 6 each associated Senior Holder FinancialInstrument and Subordinate Holder Financial Instrument is includedwithin a Master Financial Instrument. The two embodiments otherwiseoperate in a similar manner.

Referring now to FIG. 7, a block diagram of a software program accordingto another embodiment of the present invention is shown. As seen in thisFig., Software Program 701 includes: 1) Database Module 703 for storingdata concerning each credit, each senior holder, each subordinateholder, each senior holder financial instrument, each subordinate holderfinancial instrument, the transaction pool, each sub-pool, and eachmini-pool; 2) Allocation Module 705 for allocating sub-pools to thetransaction pool, for allocating mini-pools to each of the sub-pools,and for allocating credits to each of the mini-pools, sub-pools, andtransaction pool; 3) Association Module 707 for associating a seniorholder and a subordinate holder with each of the credits by associatinga) a senior holder with a respective senior holder financial instrumentthrough which payments from a respective credit flow to the seniorholder and b) a subordinate holder with a respective subordinate holderfinancial instrument through which payments from a respective creditflow to the subordinate holder; and 4) Crediting Module 709 for: i)crediting payments from each subordinate holder financial instrumentassociated with credits within the same mini-pool as a defaulting creditto perform the obligation of the senior holder financial instrumentassociated with the defaulting credit for the benefit of the seniorholder to the extent that payments due the senior holder associated withthe defaulting credit are not available; ii) crediting payments fromeach subordinate holder financial instrument associated with creditsoutside the mini-pool with the defaulting credit but within the samesub-pool as the defaulting credit to perform the obligation of thesenior holder financial instrument associated with the defaulting creditfor the benefit of the senior holder to the extent that the payments ofeach subordinate holder financial instrument associated with creditswithin the same mini-pool as the defaulting credit which were used forthe benefit of the senior holder do not cover the obligation of thedefaulting credit; iii) crediting payments from each subordinate holderfinancial instrument associated with credits outside the sub-poolcontaining the defaulting credit to perform the obligation of the seniorholder financial instrument associated with the defaulting credit forthe benefit of the senior holder to the extent that the payments of eachsubordinate holder financial instrument associated with credits withinthe same sub-pool as the defaulting credit which were used for thebenefit of the senior holder do not cover the obligation of thedefaulting credit; iv) crediting each subordinate holder associated withcredits outside the sub-pool containing the defaulting credit with thebenefit of the obligation of the defaulting credit to the associatedsenior holder to the extent that the payments due each subordinateholder associated with credits outside the sub-pool containing thedefaulting credit were used to perform the obligation of the defaultingcredit; v) crediting each subordinate holder associated with creditswithin the same sub-pool as the defaulting credit with the benefit ofthe obligation of the defaulting credit to the associated senior holderto the extent that payments due each subordinate holder associated withcredits within the same sub-pool as the defaulting credit were used toperform the obligation of the defaulting credit and to the extent that abenefit exists after any benefit is provided each subordinate holderassociated with credits outside the sub-pool containing the defaultingcredit; and vi) crediting each subordinate holder associated withcredits within the same mini-pool as the defaulting credit with thebenefit of the obligation of the defaulting credit to the associatedsenior holder to the extent that payments due each subordinate holderassociated with credits within the same mini-pool as the defaultingcredit were used to perform the obligation of the defaulting credit andto the extent that a benefit exists a) after any benefit is providedeach subordinate holder associated with credits outside the sub-poolcontaining the defaulting credit and b) after any benefit is providedeach subordinate holder associated with credits outside the mini-poolcontaining the defaulting credit and within the sub-pool containing thedefaulting credit.

Referring now to FIG. 8, a block diagram of a system according toanother embodiment of the present invention is shown. As seen in thisFig., Computer 801 includes Memory 803 for storing a software program(not shown) and CPU 805 for processing the software program. Monitor807, Keyboard 809, Mouse 811, and Printer 813 are connected to Computer801 to provide user input/output. The software program stored in Memory803 and processed by CPU 805 may of course be the software program ofthe present invention. In any case, the details of each of Computer 801,Memory 803, CPU 805, Monitor 807, Keyboard 809, Mouse 811, and Printer813 are well known to those of ordinary skill in the art and will not bediscussed further.

Referring now to yet another embodiment of the present invention, credittranches may be created by having an issuer's bonds (hereinafter “IssuerBonds” or “IBs”) deposited in a trust which in turn issues variousclasses of securities (hereinafter “Trust Bonds” or “TBs”). Such TrustBonds may be related to the Issuer Bonds and may be issued to the publicand/or to any other appropriate group. It is believed that this approachmay work to permit credit tranching for securities, such as GeneralObligations, for which the issuer may not have authority to createtranches directly. In the event of a payment of less than all of theamount due on the Issuer Bond(s), the entire amount received on theIssuer Bond(s) would go first to secure payment of debt service on therelated senior Trust Bond(s) with any balance going to pay the debtservice on the subordinate Trust Bond(s). FIG. 9 shows a diagram of sucha flow of funds (debt service is abbreviated as “D/S” in this Figure).

In one example of the present embodiment the terms of the Trust Bonds,such as, for example, amount, payment dates, and redemption provisions,but excluding interest rates, would substantially mirror the provisionsof the related Issuer Bond(s).

For any Issuer Bond(s) for which there is express provision for theapplication of available monies to pay debt service in the event of ashortfall, in one example, this approach may create high grade credittranches and/or credit tranches with high coverage.

It is noted that outside of the housing sector, senior bonds aretraditionally assigned only a slightly higher rating than thesubordinate bonds. This suggests that either: i) there is still aperceived risk that notwithstanding the provisions for apportionment ofmonies in the event of a shortfall, no payment will be made; or ii) theportion of an issue that could be assigned a high grade rating using thetraditional senior/subordinate approach is significantly smallergenerally than is the case in housing. A possible explanation is thatthe percentage change in the revenues of the issuer necessary to resultin a non-payment of the senior bonds is not sufficiently different fromthat necessary to cause a non-payment of the subordinate bonds toprovide a materially higher level of protection. However, for issuerswith a heavy debt burden, it is believed that the difference should bematerial.

With respect to the risk of non-payment, in the case of Issuer Bondsaccording to the present invention which are secured by a net revenuepledge, the other creditors are provided for prior to the payment of anydebt service. So, given an explicit provision on the allocation of fundsin the event of an insufficiency, the risk of non-payment should beinsignificant. Consequently, a gross pledge of revenues may present agreater risk that there could be a period of non-payment while a courtdetermines how much gets applied to the cost of operations. Even so, therisk to the senior Trust Bonds would predominantly be with respect tothe timing of payment rather than with respect to payment itself.

In this regard, one method of reducing the timing risk to the senior TBswould be to find a reserve for them as soon as a payment defaultoccurred on the IBs and prior to the payment of debt service on thesubordinate TBs. This process would effectively result in application ofthe entire reserve (hereinafter “debt service reserve fund”, or “DSRF”)to secure the senior TBs and, for a typical situation, provideprotection with respect to timeliness of payment for a period of, forexample, 1.5 to 2 years (depending on the proportion of senior TBs). Ofnote is the fact that there may be tax issues with respect to the use ofthe reserve in this manner. Also, the aforementioned approach of fundinga reserve would increase the probability of an actual non-payment withrespect to the subordinate TBs (since they would not get any benefitfrom the DSRF).

If no special reserve is created for the senior TBs, then there issubstantially no difference in the probability of a non-payment eventbetween the Issuer Bonds and the Trust Bonds. However, in the event of anon-payment event, the severity of the non-payment event is more severefor the subordinate TBs than for the IBs, and less severe for the seniorTBs.

Referring now to yet another embodiment of the present invention, anapproach which addresses concerns regarding the timeliness of payment ofsenior TBs may be accomplished as follows: pool together two or moreIssuer Bond credits such that amounts available after payment of thesenior TBs for each credit are used to secure the payment of the othersenior TBs in the event that the amounts received for payment of therelated Issuer Bonds are not sufficient to pay the senior TBs. In otherwords, payments allocable to each series of subordinate TBs are appliedfirst, to the extent needed, to pay unpaid amounts on any of the seniorTBs. FIG. 10 shows a diagram of the credit structure of such an approach(debt service is abbreviated as “D/S” in this Figure).

In one example, the following discussion of the aforementioned poolingapproach assumes that substantially equal amounts of bonds are issuedfor each credit, that the bonds are issued substantially simultaneously,and that the bonds are payable on substantially the same dates.

In any case, it is noted that if the ratio of senior to subordinate TBsis 2-to-1 (i.e., 66% senior TBs), then the senior TBs of each credit arefully secured by the sum of the amounts allocable to the subordinatetranches for the other two credits. However, the ratio of total seniorobligations to the total amounts securing them is 1 to 1.33.

Further, if the ratio of senior to subordinate TBs is 1-to-1 (i.e., 50%senior TBs), the senior TBs of each credit are over-collateralized 2×.by the sum of the amounts allocable to the subordinate tranches for theother two credits. Also, the ratio of total senior obligations to thetotal amounts securing them is 1 to 2.

Applying the principles typically applicable to two-party-paysituations, the senior TBs should be rated from A to triple-A, dependingon such criteria as the percentage of senior debt, the strength of theunderlying credits, and the degree of correlation between the underlyingcredits. Each of the senior TB tranches would have both: i) anunderlying rating determined on the basis of the tranching of theindividual credit; and ii) an enhanced rating based on the impact ofpooling.

On the other hand, each of the subordinate TBs could be rated as low asthe weakest rating (without regard to pooling) of any of the senior TBtranches. The credit impact of the proposed structure on the subordinateTBs could be mitigated by: i) first applying amounts related to the sameunderlying credit; and ii) then applying amounts securing the weakest ofthe other underlying credits (thereby reducing the possibility that thesubordinate TBs related to the stronger underlying credit would beaffected).

In one example, if the senior tranches can achieve at least double-Acategory ratings, it is believed that the savings from this structurecould accrue both from lower interest rates on the senior bonds as wellas from the avoided cost of bond insurance on the senior bonds. Thosesavings would be reduced in part by any increase in yield necessary tomarket the subordinate TBs and by any increase in the costs of bondinsurance. However, the net benefit could be used to reduce the issuer'scost of funds.

Further, it is noted with regard to the present example that if theunderlying ratings of all three credits are the same, the subordinateTBs would arguably have the same ratings as the Issuer Bonds while thesenior TBs should receive significantly higher ratings. As mentionedearlier, the probability of a non-payment event would be substantiallythe same for both the Issuer Bonds and the subordinate TBs. However, ifsuch an event did occur, the severity of the event could be greater forthe subordinate TBs. (This runs counter to the idea that the issuerwould not make any payment in the event of a shortfall).

Another example of a pooled Trust Bond embodiment of the presentinvention will now be described with reference to the credit tranchingand pooling of three New York City credits. More particularly, thediscussion will be a simplified analysis of the credit tranching andpooling of the General Obligation credit (“NYCGO”), the Municipal WaterFinance Authority (“NYCWFA”), and the Transitional Finance Authority(“NYCTFA”).

In one example, the analysis assumes that the MOODYS, STANDARD & POORS,and FITCH ratings of the bonds secured by the credits are as shown inTable 1:

TABLE 1 NYCWFA NYCGO NYCTFA MOODYS A1 A3 Aa3 STANDARD & POORS A A− AAFITCH AA− A− AA+

Moreover, the analysis assumes that the pool includes two-thirds seniorand one-third subordinate TBs. Therefore, as long as not more than onecredit defaults at any time, the defaulting senior Trust Bonds will befully secured by amounts allocable to the subordinate TBs of the othertwo credits. Also, the credit tranching within each credit providesprotection except during any period in which the issuer is making nopayments on that credit. In essence, the only time that there could be aproblem with payment of the senior TBs in this example would be in thesituation where the City was simultaneously making no payments on two ofthe three credits.

Accordingly, it is believed that even though the TBs are not fullycovered by the obligations of two parties, given: i) the low correlationamong the three credits (other than with respect to general economicconditions); and ii) the fact that the diversification of the creditsand credit tranching would allow the structure to accommodatesignificant simultaneous payment shortfalls (up to 50%) with respect totwo credits without a non-payment of senior TBs, application of thetwo-party pay criteria in assessing the impact of the structure on theratings of the senior Trust Bonds should be appropriate.

Note that for each senior TB to be fully secured by two credits, thesenior TBs could not exceed 50% of each series. Given the ratings of thethree NYC credits, a literal application of the two-party pay criteriawould result in triple-A ratings on two-thirds of the senior Trust Bondsand double-A ratings on the remaining third. As in the case of the 66%senior TBs, the structure cannot withstand total non-payment of two ofthe credits at the same time. With 50% senior bonds, the structure couldwithstand a simultaneous 75% payment shortfall by two of the credits.However, this would result in a structure having a larger amount ofsubordinate TBs. Minimizing the amount of subordinate TBs is important(unless the underlying credits all have the same or very similarratings) since the rating of the subordinate TBs may be the lowestcommon denominator of the three credits. Minimizing the amount ofsubordinate TBs also spreads the benefit of the higher ratings on thesenior tranche across a larger amount of bonds.

Applying, for example, MOODY's two-party pay criteria to the scenariowith two-thirds senior bonds results in the senior TB ratings indicatedin FIG. 11 (debt service is abbreviated as “D/S” in this Figure). Thetwo-party pay criteria were applied assuming a medium correlation amongthe credits. Further, for each senior TB series, the two-party paycriteria were applied using the related underlying credit together withthe weakest of the other two credits.

Interestingly, given the Trust Bond ratings in this example, the Citywould be selling substantially the same amount of A3/A-/A-Trust Bonds asit would have been selling NYCGO's with the same rating. However, it isbelieved that the ratings on all of the other bonds would be enhanced.Possibly these “natural” double-A Trust Bonds could trade flat to orthrough insured bonds. The benefit of the bond issue to the City wouldbe the sum of: i) avoided cost of bond insurance on the senior TBs; plusii) the interest savings attributable to the credit spread between theratings on the senior TBs and the underlying ratings on any relatedIssuer Bonds; minus iii) any increase in the interest cost or cost ofbond insurance for the subordinate TBs as compared with what such costswould have been for the underlying bonds.

Moreover, by separately applying the two-party pay criteria to theportion of each series of senior TBs that is secured by each of theother series, it should be possible to assign an even higher rating toat least half of the senior TBs.

It is noted that the examples discussed above do not take into account avariety of issues, including: i) relative size of issuance among thedifferent credits; ii) different timing of issuance among the differentcredits; iii) intra-period timing issues with respect to debt servicepayments on the different categories of Issuer Bonds; iv) differences inthe shape of debt service among the different credits; v) disclosureissues raised by the structure (e.g., disclosure on all three creditscould be material to every series of both senior and subordinate bonds);vi) tax issues; and vii) legal authority of the Issuer to implement thestructure.

Another example of a slightly different application of the presentinvention would be for New York City to: i) have a single class of TBtranches for each of the GO, WFA and TFA credits; and ii) have theamounts allocable to the GO and WFA TBs secure payment of TBs issued forthe TFA. Since the TFA is rated higher, the exposure to the TFA creditshould not hurt the ratings of the GO and WFA TBs. However, the TFA TBsshould be rated triple-A.

Referring now to another example of a pooled Trust Bond embodiment ofthe present invention, a credit structure combines the revenues from twoor more systems as part of a single security package. More particularly,a trust could hold senior lien obligations from the two or more systems.In one example, the trust may be single purpose trust. The trust couldhave the authority to issue securities against those securities held inthe trust. Each system could be legally responsible for their respectiveobligations to the trust. The trust, in turn, could issue securities tothe public in a senior/subordinate structure. The revenue stream flowingout of the trust from the obligations of the two or more systems (e.g. awater system and a sewer system), which could mirror the principal andinterest on the publicly held debt, could provide bondholder security.The senior/subordinate structure could allow the trust to tranche thesecurities with differing coverage ratios. Such tranched securitiescould allow for the senior lien obligations to be rated higher than theunderlying obligations on their own.

A more specific example of the aforementioned embodiment of the presentinvention could work is as follows: A water system and a sewer systemcould each issue bonds in the total amount of $200 million to the trust(i.e., $100 million each). The trust could then issue bonds to thepublic consisting of $100 million senior lien bond(s) and $100 millionjunior lien bond(s). Bondholders in general would benefit because therevenues used to pay debt service would be coming from both the waterand sewer systems. In addition, the senior lien bondholders wouldbenefit because their bonds would have coverage of 2.0×(at least $200million in revenues to pay $100 million in senior lien obligations). Ifthere were to be a default by either the water or sewer system to thetrust, the senior lien bondholders would be secured because thenon-defaulting system's revenues would cover the senior lienobligations. It is believed that in one example a structure like thiswould allow the senior lien bond(s) to achieve a rating of at leastAa2/AA (by STANDARD & POORS, for example), while the junior lien bondswould receive ratings at the lower of the water or sewer system ratings.

While a number of embodiments of the present invention have beendescribed, it is understood that these embodiments are illustrativeonly, and not restrictive, and that many modifications may becomeapparent to those of ordinary skill in the art. For example, while thepresent invention has been described with reference to each credit beingassociated with a single senior holder financial instrument and a singlesubordinate holder financial instrument any desired number of tieredseniority senior holder financial instruments and/or tiered senioritysubordinate holder financial instruments could be used. Further still,while the present invention has been described with reference to eachsenior holder financial instrument and each subordinate holder financialinstrument being associated with a single respective senior holder and asingle respective subordinate holder any desired number of seniorholders and/or subordinate holders could be associated with eachrespective senior holder financial instrument and subordinate holderfinancial instrument. Further still, each TSB holder (i.e., each seniorholder or each subordinate holder) could directly own the respectiveunderlying credit or have a pass-through interest in the form ofownership of an interest in a mutual find, trust, partnership, orcorporation (either debt or equity). Further still, the obligation ofsubordinate holders to cover for senior holders could be in the form aguarantee, an insurance policy, or an agreement to purchase (either allpayments or defaulted payments). Further still, each credit andassociated senior holder financial instrument and/or subordinate holderfinancial instrument could be incorporated into a single instrument.Further still, the present invention may be implemented with or withoutthe cooperation of a credit issuer. Further still, the pooled creditscould be from related issuers and/or from separate issuers. Furtherstill, the pool may have a relatively large number of credits (a largerpool should allow for smaller subordinate TB tranches.) Further still,even for a large pool of general infrastructure type credits (excludingbonds such as appropriation bonds, with significant event risk), itshould be valid to assume that not more than two or three credits wouldever be in a non-payment mode at the same time. Further still, thememory of the system may comprise a magnetic hard drive, a magneticfloppy disk, a compact disk, a ROM, a RAM, and/or any other appropriatememory. Further still, the computer of the system may comprise astand-alone PC-type micro-computer as depicted or the computer maycomprise one of a mainframe computer or a mini-computer, for example.Further still, another computer could access the software program beingprocessed by the CPU by utilizing a local area network, a wide areanetwork, or the Internet, for example.

1. A computer-implemented method for structuring a financialtransaction, which comprises: associating, by a computer system, a firstsenior holder and a first subordinate holder with a first credit havinga first obligation to make at least one payment, including holding in afirst sub-pool a first subordinate obligation of the first obligation topay the first subordinate holder from the first credit; and structuringin at least one computer memory, at least one payment from a financialinstrument associated with a second sub-pool to perform the obligationof the first credit for the benefit of the first senior holder to theextent that the first credit enters a default state and another paymentdue the first senior holder from at least one obligation in the firstsub-pool to make the other payment is not available.
 2. The method ofclaim 1, which further comprises: associating, by the computer system, asecond senior holder and a second subordinate holder with a secondcredit having a second obligation to make at least one payment,including holding in a second sub-pool a second subordinate obligationof the second obligation to pay the second subordinate holder from thesecond credit.
 3. The method of claim 1, which further comprises:increasing in the at least one computer memory a credit rating for thefirst credit based on an increased likelihood that a payment default bythe first credit can be fully absorbed.
 4. The method of claim 1,wherein the first credit is specified by a financial instrument in theform of a bond.
 5. The method of claim 1, which further comprises:adjusting the first credit based on the structured payment.
 6. Themethod of claim 1, wherein risks within the first sub-pool are similarto each other, and the risks are different than other risks within thesecond sub-pool.
 7. The method of claim 1, which further comprises:issuing for the first subordinate obligation, first tranched trust bondscomprising a senior trust bond related to the first subordinateobligation and a junior trust bond.
 8. The method of claim 7, wherein agiven bond of the senior and junior trust bonds include terms that arebased on terms of the first subordinate obligation, and wherein theterms further comprises an interest rate yield paid for the given bondthat is different than an interest rate yield of the first subordinateobligation.
 9. The method of claim 8, wherein the interest rate yield ofthe given bond is higher than the interest rate yield of the firstsubordinate obligation.
 10. The method of claim 7, wherein the firstcredit has i) an underlying rating based on a tranching of the tranchedtrust bonds and ii) a credit rating based on an increased likelihoodthat a payment default by the first credit can be fully absorbed. 11.The method of claim 7, which further comprises: securing a given trustbond within the first tranched trust bonds first with a debt servicereserve fund and second with a net revenue pledge from the payment dueto the first subordinate holder.
 12. The method of claim 7, wherein thefirst tranched trust bonds are held within the first sub-pool.
 13. Themethod of claim 12, wherein a trust payment due for a given trust bondin the sub-pool are paid to a senior holder of a credit that is relatedto the given trust bond before being paid to another senior holder ofanother credit that is unrelated to the given trust bond.
 14. Acomputer-implemented system for structuring a financial transaction, thesystem including a processor for operating various financial modules,the system comprising: a computer implemented association moduleconfigured for: associating a first senior holder and a firstsubordinate holder with a first credit having a first obligation to makeat least one payment; a computer implemented allocation moduleconfigured for: allocating in a first sub-pool a first subordinateobligation of the first obligation to pay the first subordinate holderfrom the first credit; a computer implemented credit module configuredfor: structuring in a database module, at least one payment from afinancial instrument associated with a second sub-pool to perform theobligation of the first credit for the benefit of the first seniorholder to the extent that the first credit enters a default state andanother payment due the first senior holder from at least one obligationin the first sub-pool to make the other payment is not available. 15.The system of claim 14, wherein the association module is furtherconfigured for: associating a second senior holder and a secondsubordinate holder with a second credit having a second obligation tomake at least one payment.
 16. The system of claim 14, which furthercomprises a further computer module configured for: increasing in atleast one computer memory a credit rating for the first credit based onan increased likelihood that a payment default by the first credit canbe fully absorbed.
 17. The system of claim 14, wherein the first creditis specified by a financial instrument in the form of a bond.
 18. Thesystem of claim 14, wherein the credit module is further configured foradjusting the first credit based on the structured payment.
 19. Acomputer non-transitory readable medium for structuring a financialtransaction comprising instructions than when executed by a processorcauses the processor to perform actions which comprises: associating afirst senior holder and a first subordinate holder with a first credithaving a first obligation to make at least one payment, includingholding in a first sub-pool a first subordinate obligation of the firstobligation to pay the first subordinate holder from the first credit;and crediting a payment from a second subordinate holder financialinstrument to perform the obligation of the first credit for the benefitof the first senior holder to the extent that the first credit enters adefault state and another payment due the first senior holder from anobligation in the first sub-pool to make the other payment is notavailable.
 20. The medium of claim 19, wherein the actions furthercomprise: associating a second senior holder and a second subordinateholder with a second credit having a second obligation to make at leastone payment, including holding in a second sub-pool a second subordinateobligation of the second obligation to pay the second subordinate holderfrom the second credit.